Booming Bangladesh looks forward to LDC graduation

October 30, 2017

Bangladesh, the largest least developed country (LDC) in terms of population and economic size, looks likely to leave the LDC category by 2024, propelled by better health and education, lower vulnerability and an economic boom.

The CDP measures the LDC category on the basis of per capita income, a human assets index and an economic vulnerability index. A country must exceed thresholds on two of the three criteria at two consecutive triennial reviews to be considered for graduation. Bangladesh looks likely to be the first LDC ever to graduate on the basis of all three criteria.

Bangladesh’s success comes on the back of six straight years in which economic growth has exceeded 6%, culminating in some of the fastest growth rates in the world in recent years. As the following graph shows, per capita gross national income using the World Bank Atlas method has outstripped the LDC average since 1996 and has recently risen above the threshold used by the CDP.

The economy has developed largely on the basis of textile and garment exports. Clothing forms a higher share of exports than in any other country. Remittances, natural gas, shipbuilding and seafood, as well as information communications and pharmaceuticals are all emerging sources of foreign exchange and economic growth.

Unlike in many countries, developed and developing, this economic boom has helped the poor. Since 1990 about 50 million people left extreme poverty, as defined by the World Bank, a reduction in the poverty rate from 40% to 14%. Bangladesh’s government and thriving non-government organisations have helped provide vital health and education services to the poor, translating into rapid improvements in the human assets index used by the CDP.

Increases across the five components of the human assets index – infant mortality, maternal mortality, undernourishment, adult schooling and adult literacy – meant that Bangladesh exceeded the threshold on this index for the first time in 2016.

Human assets index, Bangladesh and LDC average, 1999-2017

Source: Committee for Development Policy Secretariat

Bangladesh is also somewhat unusual in that it has enjoyed a reduction in economic vulnerability. The economic vulnerability index has consistently decreased since 2003, the first year it fell below the CDP’s official threshold. This is partly explained by greater export stability and diversification.

Economic vulnerability index, Bangladesh and LDC average, 1999-2017

Source: Committee for Development Policy Secretariat. Note: Bangladesh’s population index is zero as its population is larger than 100 million.

Bangladesh’s graduation will have some implications for the economy, although during the CDP mission many of the main stakeholders – including the government and private sector – confirmed that graduation would be a major step forward in the country’s history and therefore an event to be welcomed.

Official development assistance is a relatively small proportion of government expenditure and appears unlikely to decline solely on the basis of LDC graduation – despite donors’ official commitment to prioritise LDCs. The other special international support measures for LDCs, such as travel grants, reduced UN and peacekeeping budget commitments and scholarships, are considered relatively unimportant given the size of the economy.

Following graduation in 2024 the country would probably be given a three-year transition period before it lost duty-free, quota-free market access to the European Union under the Everything but Arms initiative for LDCs. After 2027, provided that it ratifies 27 conventions on human and labour rights, environment and governance, Bangladesh may be expected to gain access to the Generalised System of Preferences Plus (GSP+), giving it dedicated preferential tariff rates.

The impact of any tariff increases would, however, be divided between exporters and importers, meaning that European clothing companies may pay some or all of the difference. Bangladeshi exporters are confident that the country will remain competitive over the medium term against major comparators like Vietnam, reducing the importance of tariff preferences. Business leaders say that tariff advantages are not the key obstacle to export success, and that a number of other economic challenges are more important, including infrastructure, the exchange rate and the outlook for the global economy.

An increasing volume of garment production is being offshored from China, providing additional opportunities for countries like Bangladesh. Meanwhile the economy is gradually diversifying, particularly into services, which do not face goods tariffs and which are therefore less affected by LDC graduation.

Several stakeholders suggest that the improvement to Bangladesh’s image on the world stage from graduation would give it a better credit rating, allowing it to borrow more cheaply on world markets. Moody’s rating agency currently ranks the country as Ba3, which is below investment grade and assigns Bangladesh’s bond the ‘high-yield’ or ‘junk’ status, although the outlook is stable. Infrastructure investment is a pressing priority given the country’s traffic congestion, high and growing population and the rapid pace of development.

Bangladesh’s LDC graduation is certainly not the end of the story. Although a move on to the next rung of development is a major milestone in the nation’s history, pressing economic challenges remain, such as how to raise wages for the working poor without losing international competitiveness. Bangladesh’s comparative advantage currently lies in cheapness; yet low wages by definition perpetuate poverty. Although extreme poverty has fallen, many people remain in low-paying jobs. Population pressures, climate change and the automation of production are ever-present challenges. How the country navigates its journey into middle-income status will be one of the defining issues of the coming decade.

Daniel Gay

Inter Regional Adviser on LDCs, Committee for Development Policy

All views are those of the author and do not necessarily represent the views of the Committee for Development Policy (CDP), its Secretariat, or the United Nations. This document should not be considered as the official position of the CDP, its Secretariat or the United Nations.